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TheStreet Open House

Political, Popular Obstacles Block Pension Changes

By DAVID KLEPPER

Detroit's bankruptcy is casting a shadow over a long list of cities across the U.S. and giving mayors new urgency in the search for solutions to the greatest challenge to face America's cities in a generation.

While no other city is expected to join Detroit in bankruptcy court anytime soon, similar problems brought on by waning industries, crushing debt and surging pension costs plague city halls from Providence, R.I., to California, and in response mayors are proposing big changes to what was long the biggest perk of a government job: a good and reliable pension.

"It's the lesson of kicking the can down the road. You can put these things off. But at some point the bill comes due," Baltimore Mayor Stephanie Rawlings-Blake said in an interview. "People ask me sometimes what keeps me up at night. The prospect of being one of those cities is what keeps me up at night."

The total unfunded pension liability for all U.S. cities and counties is a whopping $574 billion, according to a 2010 study by economists at Northwestern University. That's a formidable burden to cities already struggling with revenue declines, debt and the ongoing cost of providing services.

Years of financial neglect left Detroit's finances in ruin, prompting its emergency manager to propose sweeping changes to the way the city doles out benefits by eliminating payment increases and creating a new 401(k)-style retirement system.

Rawlings-Blake has also proposed giving new employees a defined contribution plan, one that combines set contributions from workers and their employer, similar to the 401(k) accounts familiar to private-sector workers. The change would be just one part of an ambitious 10-year-financial plan that involves lower property taxes, a smaller city workforce and the goal of attracting 10,000 new families to Maryland's largest city.

New York Mayor Michael Bloomberg said the lesson from Detroit â¿¿ burdened by $18 billion in debt, declining revenue and huge deficits â¿¿ is that cities will ultimately pay a steep price for ignoring long-term challenges including diversification of industry, adequate funding of pension systems, population decline and debt.

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